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Monthly Archives: March 2022

March 3, 2022

Going Private: Survey of 2020 Sponsor-Backed Deals

Late last year, Weil issued a survey highlighting the key terms of 2020 sponsor-backed going private deals. The survey covered 20 U.S. sponsor-backed going private transactions announced between January 1, 2020 and December 31, 2020 with a transaction value of at least $100 million. Here are some of the key findings:

– As was the case in 2019 and other prior recent years, none of the surveyed going private transactions in 2020 contained a financing out (i.e., a provision that allows the acquirer to get out of the deal without the payment of a fee or other recourse to seller in the event the acquirer’s debt financing is unavailable). This type of provision, which first emerged in connection with the financial crisis, was more commonly used in the past. As noted below, specific performance lite continues to be the predominant market remedy with respect to allocating acquirer’s financing failure and seller’s closing risk.

– While the appearance of the specific performance lite construct decreased from 93% of the surveyed going private transactions in 2019 to 75% (15 of 20) of the surveyed going private transactions in 2020, specific performance lite continued to be the predominant market remedy with respect to allocating acquirer’s financing failure and seller’s closing risk in sponsor-backed going private transactions. Full specific performance was available to targets in 25% (5 of 20) of the surveyed going private transactions in 2020, which represents an increase as compared to 7% of the surveyed going private transactions in 2019 where full specific performance was available. In the 5 transactions where full specific performance was available, 2 had a full equity backstop.

– The reverse termination fee construct appeared in 85% (17 of 20) of the surveyed going private transactions in 2020 (as compared to 100% of the surveyed going private transactions in 2019).

– The mean single-tier reverse termination fee that would have been payable by sponsors in certain termination scenarios was 6.6% as a percentage of the equity value of the target, which represents a slight decrease in the mean single-tier reverse termination fee of 6.7% as a percentage of the equity value of the target in 2019. The mean target termination fee was 3.1% as a percentage of equity value of the target, which is a slight decrease of the mean target termination fee of 3.2% as a percentage of the equity value of the target in 2019.

Interestingly, the survey says that the use of go-shops declined sharply in 2020. Only 10% of the deals surveyed included a go-shop, as compared to 60% of the transactions surveyed in 2019. Tender offers were also more common in 2020. Tender offers were used in 45% of the surveyed going private transactions in 2020. No 2019 deals were structured as tenders and only 18% of 2018 deals incorporated a tender offer.

John Jenkins

March 2, 2022

Fiduciary Duty: Director’s Abstention Isn’t a Get Out of Jail Free Card

Sometimes, people assume that if a director has a conflict, abstaining from voting on a transaction will be enough to insulate that individual from a fiduciary duty claim.  While abstaining sometimes may be a prudent decision, the Chancery Court’s recent decision in Lockton v. Rogers, (Del. Ch.; 2/22), provides a reminder that abstaining from a vote on the deal isn’t necessarily a “get out of jail free” card.

The case arose out of a series of transactions engineered by creditors & preferred stockholders of WinView, Inc. who made up a majority of the board and that culminated in a squeeze-out of the common stockholders. The plaintiffs alleged that the director defendants breached their fiduciary duties by ignoring alternative transactions that were better for the common stockholders and by approving a deal that transferred benefits to creditors & preferred holders that weren’t not shared with the common stockholders.

The company’s Executive Chairman, who was a stockholder and Chairman of one of the acquiring entities in the squeeze-out, argued that duty of loyalty allegations against him should be dismissed because he abstained from voting on the merger. Vice Chancellor Glasscock decided that wasn’t enough to allow him to escape the fiduciary duty claim, at least at the pleading stage:

There is “no per se rule that unqualifiedly and categorically relieves a director from liability solely because that director refrains from voting on the challenged transaction.” Notably, Rogers does not contend that he abstained from negotiating the Merger. The Amended Complaint alleges that Rogers told Lockton in November 2019 that he had personally negotiated a binding term sheet for the Merger.

Delaware law does not allow directors who negotiated a transaction to “specifically to shield themselves from any exposure to liability” by “deliberately absent[ing] themselves from the directors’ meeting at which the proposal is to be voted upon.” I therefore decline to “accord[] exculpatory significance” to Rogers’ “nonvote.” It is reasonably conceivable at this pleading stage that Rogers breached his duty of loyalty by participating in the Merger negotiations.

The Vice Chancellor also refused to apply Corwin to the transaction, noting that because the preferred stockholders received benefits that were not shared with the common stockholders, the favorable vote of a majority of the common stockholders was required in order to cleanse the deal under Corwin.

John Jenkins

March 1, 2022

Antitrust: Implications of Recent Vertical Merger Challenges

This WilmerHale memo reviews recent FTC challenges involving vertical mergers and discusses some of the implications of those actions. Here’s the intro:

Since March 2021, the Federal Trade Commission (FTC or Commission) has challenged three proposed acquisitions based on vertical competitive concerns. The parties in two of those transactions—Nvidia/Arm and Lockheed Martin/Aerojet Rocketdyne—recently announced that they were abandoning the deals.

Following Nvidia’s abandonment, the Commission announced that the “result is particularly significant because it represents the first abandonment of a litigated vertical merger in many years.” The last time a party abandoned a vertical acquisition after the FTC sued was nearly two decades ago. Indeed, over the past decade, the FTC brought only six cases based on purely vertical concerns and entered a consent decree to resolve each of them without litigation.

The FTC’s recent challenges come at a time when the FTC’s Democratic commissioners have repeatedly articulated a focus on vertical mergers. In each case, the FTC acted unanimously to challenge the transaction, alleging that the acquisition involved the sole supplier (or, in Lockheed/Aerojet, the only non-vertically integrated supplier) of critical inputs for downstream competitors. Because these actions involved traditional vertical concerns, however, it remains uncertain how far the FTC will go in challenging vertical transactions based on novel or attenuated theories of competitive harm. And the FTC’s refusal to accept remedy proposals to address its competitive concerns may tell us more about the future than the challenges themselves.

The memo provides a list of factors that these recent proceedings suggest should be considered by companies that are either contemplating a vertical merger. For example, the memo says that parties looking at a deal involving a dominant input supplier and an important downstream competitor should expect their transaction to be the subject of a substantial investigation. Those parties need to be able to demonstrate that their proposed deal won’t provide the post-closing business with the incentive or ability to raise costs for or to cut-off other downstream competitors.

John Jenkins